Dec. 27 (Bloomberg) -- Dameon and Sabine Rhodes didn't worry too much about their $20,000 in credit-card debt when they were both working and bringing in about $85,000 a year.

Then Dameon, 32, lost his technician job at Nextel Corp. in Houston, and was only able to find part-time work. In September, the couple filed for protection from creditors under Chapter 7 of the U.S. bankruptcy code, allowing them to forgo their credit- card debt.

``We needed to get things under control,'' Dameon Rhodes said. ``We just weren't able to handle all the debt.''

Middle-income consumers like the Rhodeses, and higher- earning ones too, may soon find it harder to wipe the slate clean. After six years of effort, credit-card issuers such as New York-based JPMorgan Chase & Co. and London-based HSBC Holdings Plc believe they may finally be able to win congressional passage of legislation limiting individuals' use of bankruptcy to avoid repaying unsecured loans.

The stakes are high for creditors and debtors alike. Personal-bankruptcy filings have almost doubled in the last decade, reaching 1.58 million for the last 12 months, compared with about 800,000 in 1995, according to the Administrative Office of the U.S. Courts. The Bankruptcy Coalition, a lobbying group that includes JPMorgan Chase and HSBC, says those bankruptcies cost them $40 billion each year.

The law the banks want would apply a means test to individuals seeking bankruptcy. Those, like the Rhodeses, whose family income is above the median for their state would be subject to the test, and might not be able to file for the kind of debt-canceling protection, known as Chapter 7. Instead, they'd have to file a Chapter 13 bankruptcy, in which they would be required to repay some debt while being allowed to retain assets.

Failing the Test

About 11 percent of those who filed for Chapter 7 would have failed the means test, according to a 1998 study funded by San Francisco-based credit-card servicer Visa International Inc.

Some Democrats and consumer groups who oppose the legislation say credit-card companies are partly at fault for the rise in bankruptcies because they have targeted so much of their marketing to households that can't afford to repay their debts. The new law, they said, would mostly affect struggling middle- income families.

``It's very likely we're going to see another attempt to make it harder for middle-income Americans who have suffered genuine financial misfortune to have the protections of bankruptcy court,'' said Travis Plunkett, legislative director for the Consumer Federation of America.

Ralph Nader, the consumer advocate and former presidential candidate, said the bill aims to punish consumers without addressing more egregious abuses in corporate bankruptcies.

Passing On Costs

The Financial Services Roundtable, which represents major banks in lobbying for the measure, said the rising costs of unpaid loans to banks hurt all consumers, because the industry is forced to pass costs on to their customers in the form of higher fees and interest rates.

``Abuse of the bankruptcy system by those debtors who have demonstrated ability to repay their debts has a negative impact on our economy,'' Steve Bartlett, president of the Washington- based group, said in a 2003 letter to Republican Representative Michael Oxley of Ohio, chairman of the House Financial Services Committee.

Bankruptcy bills have passed both the House and Senate three times since 1998, only to die in the final stages of compromise. Proponents are more optimistic this time. ``The election outcome has brightened the prospects for bankruptcy reform,'' said Rick Lazio, a former U.S. representative from New York who is now executive vice president for global government relations at JPMorgan.

Political Gains

Republicans gained four Senate seats in the election, giving them 55 out of 100; three former House Republican lawmakers who won Senate seats -- John Thune of South Dakota, Jim DeMint of South Carolina and Richard Burr of North Carolina -- voted in favor of the bill in the past. In addition, a long-time supporter of the legislation, Senator Harry Reid of Nevada, was elected Senate Democratic leader; New York-based Citigroup Inc. has a credit-card processing center in his home state.

Republican Senator Charles Grassley of Iowa, a chief sponsor of the bill, said Senate Republican Leader Bill Frist of Tennessee promised to bring the legislation to a vote in 2005, after declining to bring it up for the last two years.

``I've been assured by Senator Frist that it will have time early in the year,'' Grassley, chairman of the Senate Finance Committee, said in an interview. ``And I think the enhanced Republican majority will help our effort to get it passed.'' The legislation will be brought up for a vote sometime in 2005, said Amy Call, Frist's spokeswoman.

Nader said in an interview that the Republicans would pass the law next year because ``there's no one to stop them.''

Rising Rates

U.S. banks have been charging off more consumer loans in recent years after consumers stopped repaying or had their debts discharged through bankruptcy proceedings, and that will likely increase as interest rates rise, said John McCune, a banking industry analyst with SNL Financial in Charlottesville, Va. The top 25 largest U.S. banks charged off $19.3 billion in loans in 2000; that grew to $27.5 billion in 2003, SNL data show.

In 2003, Citigroup led the pack with $7.5 billion in charged- off consumer loans, followed by Charlotte, North Carolina-based Bank of America Corp., with $2.3 billion, according to SNL data. JPMorgan was next, with $1.6 billion.

The biggest boon to creditors from the proposed legislation is that many consumers will be discouraged from filing under Chapter 7, said Edward Janger, a professor at Brooklyn Law School. The bill allows creditors to demand a hearing before a judge to determine whether a person filing for bankruptcy would fail the means test and should instead file under Chapter 13. The cost of hiring an attorney to prepare for and attend the hearing would deter many applicants, he said.

Abortion

The last attempt to pass the legislation in 2002 stalled because the Senate's version, approved 82-16, included a provision offered by Senator Charles Schumer, a New York Democrat, that blocked abortion protesters from filing for bankruptcy to avoid paying court-ordered fines. The House version, approved 306-108, didn't include the provision.

The final compromise included Schumer's provision, and Republican abortion opponents in the House joined with Democratic opponents of the broader bill to block it from floor consideration.

The House passed the measure in 2003, but Frist declined to bring it to a vote in the Senate because he feared a Democratic filibuster -- a legislative maneuver by which a minority can stymie action unless 60 senators vote to proceed.

Reid's Role

When the new Congress begins in January, the legislation could be an early test of Reid's ability to erase the image of Democrats as obstructionists, said Sam Gerdano, executive director of the American Bankruptcy Institute, a non-partisan group based in Alexandria, Virginia, that studies bankruptcy law.

When the measure was brought up previously, the former Senate Democratic leader, Tom Daschle of South Dakota, voted in favor; Citigroup operates a credit-card processing center in Sioux Falls, South Dakota. Daschle, however, didn't pressure Democratic opponents to drop controversial amendments, Gerdano said, nor did he work with Republicans to otherwise limit debate and enable final passage.

Since Daschle was defeated for re-election, losing to Thune, ``the chief architect of the Senate-as-graveyard strategy is no longer there,'' Gerdano said. ``Bankruptcy could be an early test of the new leadership among the minority.''

Senate Democrats

Dennis O'Toole, the top lobbyist for HSBC, said Reid's ``elevation to minority leader is very helpful on this issue.'' Reid hasn't determined whether he will press Senate Democrats to drop tactics to block the bill, said his spokeswoman, Tessa Hafen.

Grassley said Reid told him early this fall that he wants the measure to pass. In any case, Grassley said, the bill could pass without Reid's support, if Frist is willing to devote more than a week of floor time for the bill to defeat any filibuster.

Even if Schumer succeeds in winning initial Senate passage of his abortion language, Republicans control both chambers -- they didn't in 2002 -- and can drop the language in a compromise version, Grassley said.

To contact the reporter on this story: Laura Litvan in Washington at llitvan@bloomberg.net

Last Updated: December 27, 2004 00:24 EST